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When Can You Trade Options on the New Coinbase Offering?

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Despite the other challenges we’ve faced, the last two years have been an extraordinary period for Initial Public Offerings. The surge in popularity of direct listings and the Special Purpose Acquisition Company (SPAC) have accelerated the pace at which new shares have been brought to the public.

In a traditional IPO, the company is selling shares to the public on an exchanges for the first time ever and engages the services of one or more investment banks to serve as underwriters of the offering in exchange for a combination of fees and shares. The shares being sold are newly created and the proceeds of the offering flow directly to the company.

A direct offering is similar, except that no new shares are created. The shares being traded are sold by existing shareholders – most commonly company founders, early employees and Venture Capital investors who provided pre-public financing in exchange for equity. Spotify (SPOT - Free Report)  and Slack  are examples of high-profile and successful direct offerings.

There’s also the option for a company to avoid the underwriting process by auctioning shares directly to the public, generally using a dutch-auction process in which all prospective investors buy shares at the lowest price that will satisfy the entire number of shares floated. This is fairly rare, with Alphabet (GOOG - Free Report)  – formerly Google – the only notable recent example of a successful public-auction offering, and that was way back in 2004.

2020 brought about a surge in popularity for SPACs.

A SPAC is a company that goes public before they have any significant business operations, making the financial disclosures relatively simple. The money they raise in the offering is earmarked for the acquisition of one or more private companies, bringing those companies to the public markets without them having to undertake the traditional IPO process themselves.

Though the process generally involves a slightly higher level of dilution for shareholders, it’s much faster than filing for an IPO, allowing private companies in a hot industry to raise cash and have their shares traded publicly while the industry is still hot. The practice is completely legal and can serve to improve on the efficiency of the IPO process, but investors should be aware that what they gain in expediency, they may lose in transparency. Caveat Emptor.

Coinbase Offering

On Wednesday, the cryptocurrency exchange Coinbase (COIN - Free Report) started trading on the NASDAQ as a public company. Founded in 2012 and financed primarily by venture capital, the last time the company took cash from investors was at an implied valuation of $8 billion.

Coinbase's listing was a direct offering, which means company insiders aren't subject to a 6-month lockup on share sales.

The expected initial trading price for COIN was $250/share – implying a market cap in excess of $60 billion.

Trading actually opened at midday at a price of $381/share. Coinbase went pretty much straight up to a high of $429, then retreated to $310 before settling for the day at $328.

It’s not uncommon for stocks to be volatile when they begin trading, but Coinbase was different by an order of magnitude in terms of market cap. From the expected opening price, the company gained more than $44 billion in value. It subsequently lost $25 billion of those gains.

$25 billion is the entire market cap of Nasdaq Inc (NDAQ), the exchange that the Coinbase shares are now listed!

All the excitement and price volatility makes a recent offering like this popular with the options trading crowd. But when can you trade options and execute your strategies for capitalizing on future movement?

Soon.

There are five basic rules from the Options Clearing Corporation (OCC) for listed options on the nation’s options exchanges.

-The stock must be listed on a National Market System exchange.

-There must be at least 7 million shares outstanding.

-There must be at least 20,000 shareholders.

-The stock must have more than 200k shares in average daily trading volume.

-The shares must trade above $3/share for five consecutive days.

Because Coinbase easily satisfies all of these requirements except for the “five consecutive days” of trading, that’s the only part you’ll have to wait for.

Including the day of the offering, options will generally be listed one calendar week later.

What to Trade?

I’m going to warn extreme caution when jumping into options trading on new issues. Not only are the share prices volatile, implied volatilities themselves tend to be volatile as market makers adapt to the trading patterns in each individual stock. Significant price moves in options are attractive to traders, but can also cause significant and swift losses.

If you wanted to buy this stock but feel that it's come too far, too fast to dig in now, you might consider selling puts with a strike at the price where you’d be willing to buy. You collect what tends to be a juicy premium on high implied volatilities and in the worst-case scenario, you also end up buying the stock at your target price.

Whatever you do, consider reducing your size considerably. There’s absolutely nothing wrong with trading a one-lot. You’ve heard me say this before, but it bears repeating. If you trade small and you’re right, you still make money – even if it’s a bit less than you were hoping for.

If you trade big and you’re wrong, you might blow yourself right out of the game.

The stakes are high with new issues. Make sure you live to trade another day.

-Dave

David Borun runs the Zacks Marijuana Innovators Portfolio as well as the Black Box Trading Service and the Short Sell List Trading Service. Want to see more articles from this author? Scroll up to the top of this article and click the “+Follow” button to get an email each time a new article is published.

Want to apply this winning option strategy and others to your trading? Then be sure to check out our Zacks Options Trader service.


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